Journal Issue

The Asian Dollar and Free Gold Markets in Singapore

International Monetary Fund. External Relations Dept.
Published Date:
June 1971
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S.A. Pandit

The past three years have witnessed the development of two new important international financial markets in Asia, both located in Singapore. The first is the Asian dollar market, and the second is a free gold market.

The Asian dollar market is, in a sense, an offshoot of the Euro-dollar market that has developed very rapidly in the past decade; the Euro-dollar market is a large international money market in short-term U.S. dollars, transactions in which are negotiated and completed outside the United States. The emergence of the Asian dollar market makes it possible for nonresident U.S. dollar funds (and also certain other convertible currencies) to be placed with the banks in Asia for use in Asia. The function of the Euro-dollar market is widely understood, but less is known about the Asian dollar market.

The even newer free gold market which has developed in Singapore is also largely unknown. The establishment of these two markets bears testimony to Singapore’s rising importance as a major financial center in Asia, complementing its traditional importance as one of the leading entrepôt trading centers of the world.


In the belief that there were fairly large U.S. dollar funds and also some funds of other convertible currencies in the hands of the Asians and non-Asians domiciled in Asia, and that these funds could be pooled together and invested in Asia, some of the foreign bankers operating in Singapore thought that there was a scope for developing an Asian dollar market organized along the same lines as the Euro-dollar market. In particular, these bankers believed that the Asian dollar market could, on the one hand, provide profitable investment opportunities for persons holding relatively small amounts of U.S. dollars that because of their small size could not find an investment outlet in the Euro-dollar market; and, on the other, meet the-demand for dollar funds of relatively small firms in Asia. It was also thought that the Asian dollar market would have an added appeal to potential depositors and borrowers in Asia, since they could transact business on the basis of the spot quotations for various foreign currencies given to them by the banks in this market, thereby eliminating any exchange risks which they would have otherwise to bear if the banks in Singapore were acting simply as agents of the banks participating in the Euro-dollar market. The idea of establishing this market received a great fillip and became translated into reality when, in their desire to develop Singapore as an important financial center, the Singapore authorities amended the tax laws and abolished the withholding tax on dividends paid out to nonresidents.

Participants in the Market

The initiative for the establishment of the Asian dollar market was taken by the Singapore branch of the Bank of America, and for some time after the setting up of this market in September 1968 it was the only bank in the market. Gradually, however, other banks have joined in, and at present there are 13 participants in the market, including the branches of the First National City Bank, the Chase Manhattan Bank, the Chartered Bank, the Hong Kong and Shanghai Bank, the General Bank of the Netherlands, the Bank of Tokyo, and the Mitsui Bank of Japan. Participation in the market requires a special license from the Singapore Government.

Deposit Business

The banks participating in the Asian dollar market accept deposits from foreigners (individuals as well as institutions) in specified convertible currencies. The deposits are called Asian Currency Units, analogous to the nomenclature European Currency Units applied to Euro-dollar deposits. Singapore residents can place deposits in this market, but only with the special permission of the Singapore exchange control authorities, except in the case of authorized banks. The banks are not required to obtain exchange control approval for opening each deposit account, nor do they have to report on individual accounts.

Despite the Asian dollar market’s name, and although the deposits in the market are largely nonresident U.S. dollar deposits, there are also small deposits of deutsche mark, Netherlands guilders, Swiss francs, and free yen; however, sterling deposits (external pounds) are negligible. Most of the deposits are placed for a specific time, usually one to three months. Since mid-August 1970, there has been a small volume of negotiable certificates of deposit. At present, the minimum amount of deposit that may be accepted from any party is US$25,000, or its equivalent in any other specified convertible currency. The relative smallness of this minimum is one of the major attractions for the development of this market. For people with small amounts of U.S. dollars and other convertible funds cannot participate in the Euro-dollar market where the minimum deposit amount is US$100,000. The minimum maturity period for the deposits in the Asian dollar market is one month. There is an initial limit of US$50 million on the total amount of such deposits in any bank, although permission is granted to raise this limit if warranted. The banks accepting these deposits are required to keep them in accounts separate from other accounts. It is believed that these deposits comprise mostly deposits belonging to the overseas Chinese with U.S. dollar holdings, some of the larger U.S. companies and overseas Japanese companies with major offices in Asia, and various other individuals in Asia (except in Singapore) holding foreign currency funds. Probably some banks in the region have also placed funds in this market. At the end of April 1970 the outstanding amount in the market was estimated at about US$180 million. A more recent estimate puts the figure between US$300 million and US$400 million, with the Bank of America remaining the most important participant in this market.

The banks offer varying rates of interest on Asian dollar deposits for different maturities. The rates paid by different banks are not necessarily uniform. They follow closely the rates in the Euro-dollar market. The rates are usually fixed by the banks at the opening of their business each morning, reflecting primarily the previous day’s closing rates in the Euro-dollar market. Normally, these rates hardly fluctuate during the day. Through the third quarter of 1970, the deposit rates remained high, in line with the Euro-dollar rates. Since the last quarter of 1970, however, again in line with the Euro-dollar rates, they have fallen sharply. Recent quotations, for March 31, 1971, for different maturities, were as follows (per cent per anum): one month, 42932; two months, 5; three months, 5932; six months, 51316; nine months, 6116; and twelve months, 6316. About a year ago, the range of these rates was 8 to 9 per cent. Illustrative of the closeness of the Asian dollar deposit rates with those in the Euro-dollar, the 5932 per cent rate on three-month deposits in the former market as of March 31, 1971 compared with the Euro-dollar rates of 51332 for deposits of a similar duration.

As stated earlier, one of the main attractions for the establishment of the Asian dollar market in Singapore is that interest accruing to nonresidents on their deposits in this market is exempted from the withholding tax in Singapore (formerly, interest payments on nonresident dollar accounts in the banks in Singapore were subject to a 40 per cent withholding tax). The banks are, however, subject to some other regulations. For example, as with all other deposits, the banks are required to observe a minimum liquidity ratio of 20 per cent of their Asian dollar deposits in the form of cash and other approved assets. These reserves must be quite separate from those held in compliance with the liquidity ratio requirements in respect of the banks’ non-Asian dollar deposits, and at least half of them must be held in the form of specified foreign currencies. These reserves are, however, permitted to be kept abroad in the form of interest-bearing convertible currency deposits with maturities up to three months.

Scope of Lending

The banks collecting the Asian dollar deposits are authorized to lend to any party anywhere in the world, and, as in the case of individual deposits, no reports are required on individual loans. The foreign banks can also transfer these funds to their own headquarters or branches in foreign countries. Further, these funds can be loaned to Singapore residents either in specified foreign currencies or in Singapore dollars subject to the approval of the Singapore exchange control authorities.

As stated earlier, a major feature of the market is that parties with relatively small loan demands have a good chance of obtaining loans in this market whereas their requests are likely to encounter problems in the Euro-dollar market. This is partly because the lenders in the Euro-dollar market prefer to lend relatively larger amounts and would also have some hesitation in dealing with relatively unknown parties in Asia.

In the initial stages, the bulk of the funds available in the Asian dollar market was in practice transferred to the Euro-dollar market or the United States, as there were not many suitable investment outlets in Asia, especially at the then ruling high interest rates. Now, however, a substantial proportion of these funds is believed to be lent in the Asian region. It is reported that some of the U.S. corporations operating in Singapore and in Southeast Asia are showing increasing interest in using the funds available in the Asian dollar market. Most loans have a maturity period of less than one year. The lending rates for these funds are at least 0.75 percentage point higher than the deposit rates, and are often 1.5 to 2 percentage points higher. The sharp decline in these rates in recent months, consequent upon the decline in deposit rates, is probably one of the major reasons for a significant increase in the proportion of the Asian dollar deposits being lent out in the Asian region itself.

Increasing Sophistication in the Market

In the past year, the Asian dollar market has developed a certain degree of sophistication through the introduction of two supporting services. First, in July 1970, a leading operator in the market inaugurated an interbank market in Asian dollars, thereby imparting an increased degree of liquidity to the deposits of customers and enlarging the scope for channeling the participating banks’ idle funds. There was initial reluctance by the banks in this market in dealing with one another. Later, in August, another prominent participant in the market, the branch of the First National City Bank (FNCB), initiated the development of an interbank market in Negotiable Certificates of Deposit (NCDs) which enables the depositors to secure refunds through unrestricted disposal of their deposit certificates in the market. As the FNCB has explained it, the NCD is a financial instrument which states that the issuing bank will pay to the holder of the NCD, principal plus interest at a specified maturity date. The original owner of this certificate can sell it at any time, while the owner of a regular time deposit in the Asian dollar market has no such option and has to hold his funds in the time deposit account until maturity. The NCDs are usually issued in bearer form, and when presented to the issuing bank, the latter will automatically make payment of principal plus interest to the bearer of these certificates. The owner of these certificates can sell them to anybody without endorsement. The minimum denominations vary from bank to bank, the usual minimum being US$5,000.

Prospects for Development

The Asian dollar market has developed with relatively little publicity so far. The prospects for its growth are considered favorable by the banks participating in the market as also by the Singapore authorities. This is because of their belief that there exist fairly large sums of U.S. dollars and other convertible foreign currencies in Asia which could be attracted to this market, and that there would be increasing investment opportunities for these funds in Asia and even in Australia and New Zealand.

The chances for the growth of the Asian dollar market are also enhanced by its domicile in a prosperous trading center like Singapore, with its pivotal geographic position, very well developed international banking facilities, a strong local currency backed fully by external reserves, long-time record of monetary, domestic price, and exchange rate stability,1 and an ample and a rising level of external reserves (about US$1,200 million (net) as of the end of 1970). Concerning the banks, over the years, they have acquired the necessary experience and skills to engage in increasingly enterprising and sophisticated activities. The banks also possess excellent telecommunication facilities with banks and other major financial institutions in North America, Europe, and Asia. An important ancillary point in this respect is that there is a time difference of only six hours between Singapore and London so that the banks in Singapore are open for at least a few hours at the same time that the London banks are open. This makes it possible for them to obtain the opening quotations in the London Eurodollar market before closing for the day. In a market closely related to the Euro-dollar market, this is indeed a significant advantage. In addition to the commercial banks, there are also three newly established merchant banks in Singapore. One of them is the Chartered Merchant Bankers, established by the Chartered Bank in partnership with a London merchant bank and a commodity brokerage firm. Another merchant bank was started in partnership between the First National City Bank and the Overseas Chinese Banking Corporation. These banks, which provide in-depth merchant banking services to various businesses, are the first of their kind in Southeast Asia.

Singapore’s liberal exchange control laws are also conducive to the development of the Asian dollar market. Singapore maintains no restrictions on payments for imports and current invisibles, or on transfer of capital to and from other sterling area countries. There is also a complete absence of restrictions on nonresident capital movements, which together with Singapore’s excellent international banking facilities makes it possible for the Asian dollar market to perform a very useful entrepôt banking function.

Another development which is expected to help promote the further growth of the Asian dollar market was the enactment in 1970 of a new Bank Law in Singapore which permits, among other things, the banks to open secret numbered accounts for specified categories of clients (primarily foreigners). The identity of these clients is known only to the most senior officials of the banks and would always be kept confidential. It is generally believed that the establishment of this new facility provides an added attraction to foreign depositors to place an increasing proportion of their funds in the Asian dollar market, which offers a guarantee of safety, freedom from taxation, and secrecy. This is important since there probably exists a fairly sizable amount of funds floating in Asia denominated in U.S. dollars which might seek a haven in the Asian dollar market.

Summing up, in view of the various factors mentioned above, some optimistic experts predict that the size of this market could well rise to US$1.5-2 billion, and that there would possibly be some net in take of funds from the Eurodollar market, facilitating the flow of new capital into Asia. The market would, however, necessarily be small in comparison with the Euro-dollar market—basically, it will remain a market of secondary importance. The growth of the market would largely depend upon the correctness of the estimates about the size of the currently held U.S. dollar funds in Asia, and about the likely accretions to them hereafter. The market may also receive a boost if some Asian governments decide, as is considered likely, to switch a part of their foreign currency reserves held in the Euro-dollar market to the Asian dollar market as the latter gets more firmly established. Some estimates put these reserves at a few billion dollars. It is also considered possible that even some of the industrialists and other parties holding substantial funds in the Euro-dollar market might want to shift a part of their funds to the Asian dollar market.


Although established only two years ago, in April 1969, there already exists a thriving free gold market in Singapore. This market caters exclusively to residents of the non-sterling area. Permission to import gold under this system is given only to registered importers, including the International Trading Co. Ltd. (Intra-co) in which there is a combined equity participation of 49 per cent by the Singapore Government and the Singapore Development Bank, seven banks, and three trading firms. Gold imported under this system is subject to a levy of S$3.00 (US$0.98) per ounce. This duty is smaller than that in several other gold markets, such as Hong Kong. The gold is imported mainly from London and Zurich, mostly in the form of standard bars of 0.999 fineness, although there are also some imports of smaller bars. This gold is sold to any nonresident buyers who pay for it either in specified foreign currencies or in Singapore dollars released from the so-called “external accounts” with the banks in Singapore. These buyers can use their gold for their own needs, or sell it to any other nonresidents or authorized importers under either the Gold Tender System 2 or the free gold market system, or even export it. It is believed that most of this gold finds its way to Indonesia, Viet-Nam, Laos, and the Republic of China, and possibly a limited quantity to India.

The free gold market in Singapore has been growing rapidly. Thus, the total quantity of gold imported into Singapore increased sharply from a little under 1 million ounces in 1969 to about 4.5 million ounces in 1970 (only a negligible proportion of this import is for Singapore’s domestic industrial and artistic uses). Of these imports, 2.1 million ounces came from London, and the remainder from other sources including mainly Zurich.

The price paid by the buyers in Singapore’s free gold market to the authorized gold importers in the country is generally appreciably higher than the free market prices in London, Zurich, Paris, and Beirut, but slightly lower than that in Hong Kong. Thus, on March 26, 1971, the Singapore free market gold price of US$40.475 per fine ounce, compared with the prices of US$38.88 in London, US$38.95 in Zurich, US$39.17 in Paris, US$39.25 in Beirut, and US$40.62 in Hong Kong. The price difference between the Singapore and the European markets is accounted for by the transportation and insurance costs, the import duty, and the dealers’ commission. The Singapore price is, however, much lower than the free market prices in the neighboring countries, which acts as a strong inducement for the nonresidents in Singapore to buy gold in the free market there and ship it to those countries.

In view of the prevalent wide gold price differentials between Singapore and the neighboring countries in the region, the free gold market in Singapore seems to have good prospects; and these price differentials are likely to persist in the foreseeable future because of the anticipated continuation of strong demand for gold in those countries where gold imports are prohibited.


Staff Papers is a publication through which the Fund makes available some of the studies on monetary and financial problems prepared by members of its staff. The studies published thus far have dealt with such subjects as international liquidity, balances of payments and exchange rates, inflation in relation to economic development, and national monetary and fiscal policies. Summaries in French and Spanish are appended to each article. There are three issues each year.

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The par value agreed with the Fund in June 1967 is Singapore dollars 3.06122 = US$1.

Under this system, introduced in October 1966, registered importers are permitted to import gold exclusively for sale to licensed goldsmiths for manufacturing jewelry and ornaments and for industrial uses solely for consumption in the domestic market. Imports of gold in any form by the residents of Singapore outside the Gold Tender System is prohibited except gold imported in the form of jewelry as personal effects by residents returning to Singapore from abroad. The system is called a “tender” system because the gold import licenses are issued to the successful tenderers among the registered importers. As these licenses are, in effect, auctioned there arises a premium from their issue (sale), which accrues to the Government; this premium averaged about US$2.3 per ounce in 1969.

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